Open Position: Meaning and Risk in Trading

What is an open position?

An open position is any trade that has been executed but not yet closed by an opposing transaction. Examples:
* Buying and holding 300 shares creates a long open position until those shares are sold.
* Entering a short position creates an open position until the shares are bought back.

Open positions create market exposure and remain subject to profit or loss until closed.

Key points

• An open position exists until an opposing trade closes it (sell closes a long; buy closes a short).
• The size of the position and the holding period determine how much risk it contributes to a portfolio.
• Traders can hold positions from seconds (scalpers) to years (buy-and-hold investors).

Risk and exposure

• An open position exposes capital to market movements and event risk until it is closed.
• Longer holding periods generally increase exposure to unexpected events and volatility.
• Risk from a single open position depends on its size relative to total account value—larger relative positions increase portfolio risk.

Managing position risk

• Position sizing: A common guideline is to limit any single stock position to around 2% or less of portfolio value to reduce single-issue risk.
• Diversification: Spread positions across sectors and asset classes (e.g., equities, bonds) to lower idiosyncratic risk.
• Stop-loss orders: Use stop-losses or other exit rules to limit downside on underperforming positions.
• Be aware of systemic and overnight risk—holding positions through market closes can expose you to gap risk from news or events.

Day trading and short holding periods

• Day traders and scalpers open and close positions within the same trading day (sometimes within seconds), aiming to avoid overnight exposure.
• Day trading requires discipline, a clear plan, sufficient capital, and tolerance for high transaction frequency and risk.
• If a day trader fails to close positions before the market close, they assume overnight market risk.

Closing positions

• Closing a long position: sell the asset.
• Closing a short position: buy back the borrowed shares (cover the short).
• Closing eliminates market exposure from that trade.

Summary

An open position is any active trade that exposes an investor to market risk until it is closed. Effective management combines sensible position sizing, diversification, defined exit rules (such as stop-losses), and alignment of holding periods with trading objectives and risk tolerance.